The tax shelters Canada has to offer may seem too good to be true – and they often are. What is a tax shelter? The Canada Revenue Agency considers a tax shelter to be an acquisition of property or gifting arrangement where the purchaser or donor represents deductions and tax benefits that are equal to or greater than the cost of the arrangement. Basically, a tax shelter is an arrangement that is made to minimize or avoid taxes.
Tax shelters in Canada include exploiting loopholes in tax law to earn tax deductions that are greater than the amount that you spend.
In order to understand tax shelters, it’s a good idea to understand the difference between tax evasion and tax avoidance. While tax evasion (deliberately ignoring laws or portions of laws in order to avoid paying taxes) is illegal and could have criminal consequences, tax avoidance (actions taken to minimize tax within the letter of the law) is not. However, the CRA often considers these actions contrary to the spirit and object of the law.
The CRA and Tax Shelters
For this reason, the CRA actively monitors tax avoidance trends, including all tax shelters Canada has. If the CRA challenges your tax shelter successfully, you can lose your deduction for that tax year. They can also charge a penalty against you, depending on the shelter that is used.
An example of a tax shelter that was denied by the CRA are the various charities that offer donation receipts that are much larger than the actual donation.
The CRA has denied over $6 billion in donation claims due to tax shelters it deems unacceptable.
The agency lists several “cautionary steps” for those who are looking to participate in tax shelter arrangements. These steps include:
- Knowing who you are dealing with and understanding the details of the investments that you are participating in.
- Paying attention to the income tax consequences of the investment and consulting legal advice if needed.
- Getting statements in writing from the promoter of the tax shelter rather than trusting verbal assurances.
- Asking the tax shelter promoter for copies of any advanced income tax rulings from the CRA.
- Recognizing that the CRA has three years to reassess returns. Tax shelter audits often take several years to complete so just because your return is accepted by the CRA, it does not mean that the claim will not be revised later on.
It is important to fully examine the details of a tax shelter before investing. While most are completely legal, you may not receive the tax benefits you are expecting if the CRA denies the deduction. Rather than risking making a donation or investment in an opportunity that could have the tax benefits rejected by the CRA, it’s important to speak with an independent tax professional.
Call Tax Solutions Canada today at 1-888-868-1400 to speak with our ex-CRA tax specialists about tax shelters and to find out more information on what you can do if you have donated to a potentially suspect tax shelter.